The End of Teflon Xi

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Will China’s stock market turmoil dent Xi’s stellar reputation in China?

President Xi Jinping is actually a fairly popular leader, with people being drawn to his strong stands relative to corruption, the South China Sea, and other issues.  The fall of the stock market could turn out to be the first action that seriously shakes the confidence of the people in Xi. 

 

Different cultures view leadership differently

It’s a great example of how people from different cultures can view the world differently. Since taking office China’s president, Xi Jinping, has jailed dissidents, cracked down on public expression, sharplycurtailed access to the internet, and strengthened the hand of internal security forces. While this makes him a dictator and villain in the eyes of most Americans, in China he is actually quite popular. Why?

 

Strength is respected more in China

First, because corruption is more important to most Chinese than political liberty, and the people love Xi’s aggressive anti-corruption campaign. Xi’s tough stand on issues like territorial rights in the South China Sea and cyber espionage with the US is also viewed positively in China where past exploitation at the hands of foreigners makes the Chinese particularly receptive to leaders with a firm hand toward the outside world (the Asian Infrastructure Investment Bank resonates so strongly with the Chinese for the same reason). Lastly, Xi benefits from the fact that many of China’s current economic challenges are blamed on his predecessors. They didn’t act quickly enough, so Xi has to clean up the mess. That’s what much of the public thinks and so far his reputation isn’t tarnished very much by the slowing economy.

Xi is the strongest leader China has seen since at least Deng Xiaoping and likely the most popular. Yet the volatile Chinese stock market looks like it might be the first issue to put a serious dent in Xi’s reputation at home and could be the kind of bellwether issue that signals a turn in his fortunes.

 

The stock market has been a departure from Xi’s style

Let’s start by considering how the stock market seems to be a departure from Xi’s style to date. For example, China built an oil rig in disputed waters off the coast of Vietnam. When anti-Chinese riots and violence erupted in Vietnam, China took down the rig, paused, and then continued its South China Sea expansion policy via other means. That made Xi look bold, prudent, and clever, which is reflective of his entire term in office. Relative to the stock market, China changed the rules for buying stocks on margin, watched the market soar as leverage in the market rose by 500%, then threw everything but the kitchen sink at the market to try to stop its decline, including the draconian step of suspending trading in more than 50% of the shares on the exchange. That makes Xi look foolish, desperate, and maybe even gimmicky (for allowing a stock bubble to form in order to divert attention from an otherwise decelerating economy). It’s also worth noting that China has a longstanding tradition of making economic changes slowly and gradually and Xi has definitely adhered to that principle. Except that allowing margin buying in the market to increase by 500% in a twelve month period is the opposite of gradual.

 

The economy is the bigger problem

If the stock market were Xi’s only problem, it wouldn’t be a big deal. The problem is that the stock market is the tip of the economic iceberg for China and Xi. China is in the midst of a transition from an export and investment led economy growing at 8-10% per year to a more consumer-oriented economy that will likely grow at 5-7% per year. This transition is made more challenging by the fact that China has racked up huge debts over the past five years trying to “stimulate” its economy (debt to GDP has increased from roughly 120% to more than 250%). The stock market is the latest indication that, despite rhetoric to the contrary, Xi might not have the stomach to actually wean China from its current addition to debt-induced growth.

 

If Xi handles the economy like the stock market, there will be trouble for him and China

If Xi steers the economy successfully in the aftermath of the stock market rout, then the episode will be a footnote in Chinese history. On the other hand, if the clumsy approach to the stock market portends the future approach to the economy, if the debt binge continues and market reforms are delayed, the tougher times are ahead for the Chinese economy. If that happens, the Chinese will learn the lesson that history has already taught us time and time again—when a strong leader is pitted against the market, in the long run, the market always wins.